Contract law, good faith and the Constitution

On November 17, the Constitutional Court delivered its judgment in the case of Everfresh Market Virginia v Shoprite Checkers. The case involved the validity of a clause in a lease agreement between the parties. The relevant clause provided that the lessee would have a “right to renew” the lease if it “faithfully and timeously” fulfilled its obligations in terms of the lease. Everfresh (the lessee) understood the clause to mean that it had a legal option to renew the lease and attempted to exercise this right by notifying Shoprite (the lessor) three months before expiry of the lease, that it was desirous to exercise this “right”.

As it turned out, Shoprite wrote back to Everfresh that the clause was not legally enforceable and that it did not consider itself bound by it. Shoprite was not desirous to renew the lease since it was in the process of preparing the premises for redevelopment. Everfresh remained in occupation after expiry of the lease and Shoprite started eviction proceedings in the high court, where it won the case on the basis that, in our common law, the “right of renewal” clause constituted a so-called agreement to agree, which is invalid and unenforceable. But Everfresh appealed against this finding, all the way to the Constitutional Court.

In the Constitutional Court Everfresh for the first time explicitly raised its constitutional argument, which was that the common law required development in accordance with section 39(2) of the Constitution, which provides that when a court develops the common law it is obliged to do so in a manner that is in accordance with the spirit, purport and objects of the Bill of Rights. Essentially, Everfresh argued that the common law had to be developed, since it was contrary to the “values enshrined in the Constitution” for a court to sanction a party’s non-compliance with a clause that she agreed contractually. In short, Everfresh was of the view that not only was Shoprite obliged to negotiate with a view to renewal, it was also obliged to do so in good faith. To the extent that the common law was at odds with this view, it argued, the common law required development.

Everfresh’s greatest problem in the Constitutional Court related to the fact that it did not explicitly raise the constitutional argument in the high court. Practically, this would mean that it required the Constitutional Court to be the court of first and last instance on the constitutional argument and, while there are exceptions, it is generally undesirable for any court to sit as a court of first and last instance. In the majority judgment written by Deputy Chief Justice Moseneke, the Court held that “there can be no doubt” that Everfresh changed its tune as it went along in the hierarchy of courts — to the detriment of Shoprite which would be confronted with a “change of front” at a very late stage in the proceedings. It is essentially for this reason, (as well as because of Everfresh’s failure to advance reasons as to why it is in the interests of justice for the court nevertheless to hear the appeal) that the application for leave to appeal was dismissed.

What makes this case interesting is not so much Everfresh’s procedural troubles which detrimentally affected the outcome for them. Rather, it is the court’s remarks about the role of good faith in the law of contract as well as its remarks about the relationship between the Constitution and the law of contract that drew my attention. In the majority judgment the court remarks as follows: “It is highly desirable and in fact necessary to infuse the law of contract with constitutional values, including values of ubuntu, which inspire much of our constitutional compact.”

It continues: “Were a court to entertain Everfresh’s argument, the underlying notion of good faith in contract law, the maxim of contractual doctrine that agreements seriously entered into should be enforced, and the value of ubuntu, which inspires much of our constitutional compact, may tilt the argument in its favour. Contracting parties certainly need to relate to each other in good faith. Where there is a contractual obligation to negotiate, it would be hardly imaginable that our constitutional values would not require that the negotiation must be done reasonably, with a view to reaching an agreement and in good faith.”

The minority judgment, written by Justice Zakeria Mohammed Yacoob, makes the point even more explicitly: “Good faith is a matter of considerable importance in our contract law and the extent to which our courts enforce the good faith requirement in contract law is a matter of considerable public and constitutional importance. The question whether the spirit, purport and objects of the Constitution require courts to encourage good faith in contractual dealings and whether our Constitution insists that good faith requirements are enforceable should be determined sooner rather than later. Many people enter into contracts daily and every contract has the potential not to be performed in good faith. The issue of good faith in contract touches the lives of many ordinary people in our country.”

The approach of both these judgments to the law of contract is, to say the least, at odds with our existing jurisprudence on the role of good faith in the law of contract. One of the Supreme Court of Appeal’s favourite mantra’s is that good faith plays a marginal and indirect role in our law of contract — it is not a free-floating standard to be employed by judges to adjudicate contract-law disputes.

It is a pity that this case was not properly pleaded, since it had the potential of bringing more clarity to the question whether the marginal role of good faith in contract, as espoused by the Supreme Court of Appeal in a long line of cases, is constitutionally appropriate. Judging by the remarks of the Constitutional Court quoted above, the answer to this question appears to be in the negative.